Holders of preferred stock options have special privileges ranging from liquidation rights to dividends and voting rights. Many companies create preferred stock to raise capital for their company.

As you review preferred stock options information, consider the following factors that make preferred stock options unique and appealing:

1. Preferred stock options don't offer the possible gains of common stocks, but they're independent of market fluctuations and therefore, more stable.

2. The sale of preferred stock can improve your company's debt to equity ratio.

3. Preferred stock holders receive regular dividends paid prior to paying common stock holder dividends.

4. Interest rate levels affect preferred stock values; when interest rates rise, preferred stock value goes down and when interest rates drop, preferred stock value increases.

5. Preferred stocks may be convertible, meaning they can convert to common stocks.

6. Anti-dilution protection is a key component of preferred stock options.

Action Steps
The best contacts and resources to help you get it done

Obtain preferred stock options training

If you're thinking of selling preferred stock options in your company, get some additional training to learn about the benefits and drawbacks to the sale of preferred stock options.

I recommend: Take an online equities class offered by the New York Institute of Finance. The course covers various topics, such as the various types of preferred stock options, the generation of preferred stock returns and the risks of preferred stock options. SVB Analytics offers courses, which cover the administration and tracking of preferred stock options. You can download a list of their courses and topics from the company website.

Review preferred stock options purchase agreements

Selling preferred stock options requires the creation of a purchase agreement. This legal document delineates the conditions pertaining to the sale of preferred stock options.

I recommend: Download a copy of a preferred stock purchase agreement from AllBusiness.com. The site has other forms helpful for any start-up seeking venture capital financing. Review the preferred stock options purchase agreement offered by FindLaw.

Convert preferred stock options into common stock

Generally, preferred stock can convert to common stock under two circumstances. First, the company can issue convertible preferred stocks, which offer the stockholder to convert the stocks to common stocks under certain circumstances. Second, the company can exercise its right to complete an automatic conversion of preferred stocks to common stocks. The automatic conversion occurs if the majority of preferred stock holders agree or when there is a qualified initial public offering.

I recommend: Review the criteria necessary to automatically convert preferred stock to common stock at Startup Company Lawyer. Evaluate the "Conversion Rights" section of JBV's Competitive Edge. It explains the details of voluntary and automatic preferred stock conversions.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Contact a preferred stock options consultant, such as a financial planner specializing in businesses, to obtain help with preferred stock options.
• •  Always contact an attorney for preferred stock options advice. An attorney will protect your interests by assuring that your preferred options agreement complies with the law.